Construction on the Horizon
The AGC Dissects the Supplies and Demands Affecting the Construction Industry
By Ken Simonson

The Associated General Contractors of America (AGC) is the largest and oldest national construction trade association in the United States. The AGC represents the panorama of American construction professionals — with 33,000 firms, including 7,500 of America’s leading general contractors and 12,500 specialty contracting firms. So when it comes to tracking the trends of the construction market, the AGC has a variety of sources to tap.
Culling those resources with indicators like the March construction spending figures released by the Census Bureau on May 1, it appears that nonresidential construction spending rose an impressive 1.3 percent in March and 12 percent compared to March 2007. The housing slump buried this news by dragging total spending down by 1.1 percent for the month and 3.4 percent for the year. Yet nearly every category of nonresidential spending continued to exceed year-ago levels.

In addition, estimates for nonresidential spending in January and February were each revised up, suggesting that gross domestic product (GDP) may have grown a little more in the first quarter than the Bureau of Economic Analysis (BEA) initially estimated. BEA reported in late April that real (net of inflation) GDP grew 0.6 percent, the same as in the fourth quarter of 2007.

Both private and public nonresidential construction are still growing, although public spending is losing speed. Private nonresidential spending was up 15 percent from March 2007 to March 2008, whereas public spending grew 7.2 percent. The AGC expects a further slowdown in public spending as revenues flatten out or even shrink for highways, schools and other public projects.

On the private side, the AGC expects ongoing vigor in spending on power, energy, communications, hospital, higher education and military base realignment-related projects to offset a likely retreat by office and retail construction. The biggest challenge for all nonresidential construction is runaway materials costs.

Recently, a steel supplier told customers the price of rebar was rising another $100 overnight, compounding increases of 40 to 70 percent earlier this year. The retail price of diesel fuel as of mid-May was 56 percent higher than a year ago. Copper is close to its all-time high set in May 2006, and near-record prices for oil and natural gas may push up asphalt and plastics prices.

Public agencies and private owners need to adjust to these realities. Too many of them are still assuming construction costs are rising no faster than the consumer price index (CPI), when, in fact, the producer price index (PPI) for construction inputs has gone up 6.5 percent in the past 12 months and 34 percent since steel prices first surged in December 2003. That is more than double the run-up in the CPI.

With regard to highway construction, Congress must act immediately to prevent a huge drop in spending that will begin five months from today unless the Highway Trust Fund (HTF) is replenished by the start of fiscal 2009. As the highway paving season gets under way, asphalt prices are poised to take off. Asphalt at the refinery cost 13 percent more in March than a year ago. But many states and the federal government are running low on highway funds because motorists and truckers have been driving less, buying less gasoline and diesel fuel and thus generating fewer fuel tax dollars. The AGC thinks it is imperative that Congress pass additional funding in the next few months to keep highway construction funds flowing and not choke off funds with an ill-advised moratorium.

The AGC recently backed a provision in the U.S. Senate by Senators Max Baucus (D-Mont.) and Chuck Grassley (R-Iowa) that would prevent the HTF from going into the red by restoring $5 billion in revenue for fiscal year 2009. The bill provides more investment dollars for aviation and highway infrastructure. The proposal helps states fund projects facing increasing materials costs as highway and bridge construction has increased 56 percent since December 2003.

The funding would add more construction jobs to the weakened economy. With fewer contracts to bid, contractors have less work and therefore must reduce their pay rolls. Department of Labor statistics report highway and street construction employment peaked in January 2007 and has seen a 3.2 percent decrease in construction employment over the past 15 months. America must stay competitive and a strong transportation system is a key to that success. Without the Baucus/Grassley fix there is the potential to place the United States further behind in addressing the nation’s transportation deficit.

Ken Simonson is the chief economist for the Associated General Contractors of America, based in Arlington, Va. Visit AGC at www.agc.org for more information.

Atlas Copco Acquires Grimmer, Manufacturer of Boosters and Compressors

Sweden is a mountainous country that’s home to some great machinery. Its ripe Alpine valleys produce some of the globe’s best small equipment, labeled with brand names like Volvo and Atlas Copco.

Both of those businesses have been busy of late, expanding their equipment portfolio with interesting acquisitions. While Volvo made big waves in 2007 purchasing Ingersoll Rand’s road division, Atlas Copco has just signed an agreement with Grimmer Industries Inc., USA, to acquire its Hurricane booster and GrimmerSchmidt portable compressor business.

“We have seen increased demand for higher pressures from customers in oil and gas industries,” said Ronnie Leten, business area president for Atlas Copco Compressor Technique. “The Hurricane boosters directly meet this demand and are an excellent complement to our offering. The acquisition is a strategic step to strengthen our position in these market segments.”

Headquartered in Stockholm, Sweden, Atlas Copco’s global reach spans more than 160 markets, with its own sales operations in about 80 countries. Grimmer Industries has 90 employees and boasted revenues of $25 million in 2007. It manufactures, sells and services compressed air and gas booster compressors, natural gas boosters and portable air compressors under the brands of Hurricane and GrimmerSchmidt.

Grimmer Industries Inc. is privately owned and is based in Franklin, Ind. Atlas Copco intends to retain the operations at the current location. The business will be operated by the newly formed legal entity with the name Atlas Copco Hurricane LLC, within the Portable Air division. The parties have agreed not to disclose the purchase price. At press time, the deal was expected to close in mid-May 2008.

Case Sponsors Landscapers of the Year Contest (Deadline: Aug. 29!)

Do you run a lean, green, machine company? Are you a die-hard landscaper with the consummate crew of outdoor architects? Do you have an excellent safety record and own at least three ride-on machines? Are your annual revenues $8 million or less?

Well, you might just qualify for Case’s prestigious 2009 Landscaper of the Year award.

“Case is sponsoring the Landscaper of the Year award because we want to recognize contractors who have earned the respect of their employees, their customers and the communities they work in,” said Jim Hasler, vice president, Case Construction Equipment Inc. “We’ve asked our network of dealers, who operate from nearly 400 locations, to look for customers who embody the spirit of this award.”
The program recognizes landscape contractors who exemplify the highest standards of landscape professionals, including business acumen, marketing and equipment management expertise, attention to safety and community involvement. Entrants must have owned a landscaping company for at least five years, have an excellent safety record, own at least three ride-on machines and provide a positive reflection on the landscape industry overall. Contractors can submit applications on their own behalf, or other industry professionals, such as equipment dealers can submit applications on their behalf.

“Landscapers often start their businesses with a Case skid steer and equipment financing available through their Case dealer,” Hasler said. “As they expand their businesses, Case is here for them, with compact track loaders, loader\backhoes, mini excavators, compact wheel loaders and a full line of larger equipment.”

Entrants will be interviewed by Total Landscape Care editors (who are the sponsors); they will select 12 finalists to attend a four-day, three-night, all-expenses-paid Caribbean cruise in November 2008. The event includes a special reception, industry roundtable session and an awards banquet. Nominations are open through Aug. 29, and forms are available from all Case dealers and online at www.totallandscapecare.net/loy/form.html.

RSC Acquires New England Aerial Lift Co.

The need to work in elevated jobsites is often only a temporary task for many companies and contractors. That’s why aerial work machines (from telehandlers to scissor lifts) are such a popular borrow item with rental chains.

RSC Holdings Inc., one of the largest equipment rental providers in North America, is set on expanding its reach in the lifting market. RSC just announced that it has entered into an agreement to purchase the operations and certain operating assets of American Equipment Rentals, based in Providence, R.I. American is a leading provider of aerial equipment, forklifts and other rental equipment serving commercial construction contractors. American is also one of the largest independent aerial equipment rental companies in New England with annual revenues of approximately $19 million, of which nearly 90 percent are rental revenues.

“The addition of American is a key initial step in building a solid presence in New England,” said Erik Olsson, RSC’s president and CEO. “American, as an established business with solid, long-standing customer relationships, a tenured sales force and excellent leadership, represents an ideal platform for expanding RSC’s best-in-class customer service capabilities into this market. We look forward to continuing to deliver outstanding value to customers in New England.”

The sellers of American are FST Equipment Rentals LLC and AER Holding LLC, and details of the transaction, which is expected to close early in the third quarter of 2008, were not disclosed. The acquisition is expected to be neutral to RSC’s earnings per share in 2008 and modestly accretive in 2009.

Finance for the Future
The U.S. Chamber of Commerce Provides Finance Tips for Major Equipment Purchases

1. Don’t fall for expensive service contracts. Service contracts that are pitched to you when you buy a piece of business equipment are often a good deal for the supplier — but not for you. In most cases, the amounts you would spend on a service contract is wasted money. This is especially true in the case of generic equipment that normally carries a warranty anyway — if something is going to go wrong, it will generally do so in the first 30 to 60 days, when your warranty should cover the problem.

2. There may be situations where service contracts are a good deal. For example, if the equipment was custom-built and is expected to need regular maintenance in the future, if spare parts and knowledgeable labor will be hard to find or if getting repairs done immediately is extremely important to your business’s operation, you might decide to purchase a service contract on a trial basis.

3. Compare the Net Present Value (NPV) of the loan payments. If you have decided to purchase a major asset and are planning to take out a loan, a good way to compare the options available is to do a NPV analysis of your cash flows under the various interest rates and terms your local lenders have available. Your cash flow projections should consider the loan payment outflows, as well as the revenue inflows that would result from your purchase or project.

4. Negotiate the payment schedule you want. While you’re thinking about the appearance of your cash flow budget after you complete the purchase or project, remember that you may be able to structure your loan payments to coincide with your expected cash inflows from the project. For example, you may be able to put off the first loan payment for several months, until you have begun to receive a revenue stream from the project. Depending on how strapped you are for cash, you may even be willing to accept a higher interest rate in exchange for this privilege (especially if your loan agreement allows you to pay off the loan early and refinance without a pre-payment penalty).

5. First choice for financing: suppliers. Often the best source of financing for a major equipment purchase is the manufacturer or supplier of the equipment itself. Suppliers have a vested interest in qualifying you for the loan — if you don’t qualify, they may not make the sale. Moreover, because they believe in the quality of their equipment, they’re more likely to accept it as loan collateral than a bank or finance company would. And they may be more willing to finance a greater percentage of the purchase price without requiring a hefty down payment.

6. Used equipment may qualify for higher loan-to-value ratio. If you do decide to use third-party financing (like a bank or finance company loan), you may find that you can finance a greater portion of the purchase price if you opt for used equipment. Why? New equipment depreciates so quickly that its value in a foreclosure sale may be as low as only 50 to 60 percent of the purchase price, after just a few months. Because the bank won’t want to finance more than it can easily recoup by foreclosing and selling the equipment, you may have to make a substantial down payment on the item. However, the price of used equipment is generally closer to the fire-sale value, so the bank may be more willing to loan you most, or even all, of the purchase price.

This information was provided by the U.S. Chamber of Commerce. This and other information can be found at its Web site, http://business.uschamber.com.

Steel Costs Make Volvo Raise Construction Equipment Prices

Global demand and shrinking resources is generating higher prices for many construction supply staples — from the fuel that runs machinery to the rubber that allows equipment to roll. These record global demands for commodities have led to sharp increases in the cost base of equipment manufacturers. Consequently, Volvo Construction Equipment recently announced it will raise the price of its machines and components by 5 percent globally.

“Manufacturers of heavy construction equipment are being hit hard particularly by the current record prices of commodities, such as steel, oil, iron ore and rubber,” said Scott Hall, executive vice president of Volvo Construction Equipment. “With no sign of commodity prices cooling in the foreseeable future, it has become unavoidable that these costs be offset in the form of a price increase.”

Restricted supply and burgeoning demand for steel, especially in China, has led to the cost of iron ore rising by more than 70 percent on the worldwide markets. This has resulted in a sharp increase in the price of steel and consequently in the production costs of manufacturers of construction equipment. To offset some of the impact of these rises, Volvo Construction Equipment will increase the prices of its machines, attachments and parts by 5 percent. The price increase will be made across Volvo Construction Equipment’s entire product range and implemented globally.

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